CLASSROOM OPENER GREAT BUSINESS DECISIONS – Cyrus McCormick’s Reaper On a hot summer day in 1831, several dozen farmers and hired laborers gathered in a wheat field in Virginia to watch a horse-drawn wood-and-iron device mow down rows and rows of golden wheat. On this day, twenty-two-year-old Cyrus McCormick demonstrated the reaper that his father invented and changed history as the mechanization of farming began. Soon the process of industrialization began, which turned the nation’s economy into the world’s most productive workforce. As the historian William Hutchinson noted, “Of all the inventions during the first half of the nineteenth century which revolutionized agricultures, the reaper was probably the most important.” Interestingly, the McCormicks were not the only individuals to build and develop a reaper. In fact, many other companies and individuals developed similar technology; however, Cyrus McCormick invented the business of making reapers and selling them to the farmers of America and foreign countries. His real genius was in the area of gaining and protecting patents for his technology. McCormick turned the reaper into a commercially viable product and introduced many new business practices including free trials, money-back guarantees, and installment payment plans.
2.1 Explain why competitive advantages are typically temporary Competitive advantages are typically temporary because competitors often seek ways to duplicate the competitive advantage. In turn, organizations must develop a strategy based on a new competitive advantage. 2.2 List and describe each of the five forces in Porter’s Five Forces Model Buyer power – high when buyers have many choices of whom to buy from and low when their choices are few, Supplier power – high when buyers have few choices of whom to buy from and low when their choices are many, Threat of substitute products or services – high when there are many alternatives to a product or service and low when there are few alternatives from which to choose, Threat of new entrants – high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market, Rivalry among existing competitors – high when competition is fierce in a market and low when competition is more complacent 2.3 Compare Porter’s three generic strategies Organizations typically follow one of Porter’s three generic strategies when entering a new market. (1) Broad cost leadership, (2) broad differentiation, (3) focused strategy. Broad strategies reach a large market segment. Focused strategies target a niche market. Focused strategies concentrate on either cost leadership or differentiation. 2.4 Describe the relationship between business processes and value chains A business process is a standardized set of activities that accomplish a specific task, such as processing a customer’s order. The value chain approach views an organization as a chain, or series, of processes, each of which adds value to the product or service for each customer. The value chain helps an organization determine the “value” of its business processes for its customers.
Competitive advantages are important for an organization It is even more important to understand that competitive advantages are typically temporary since competitors are quick to copy competitive advantages Can you list a few companies that achieved success through competitive advantages? United was the first airline to offer a competitive advantage with its frequent flyer mileage (this first-mover advantage was temporary) Sony had a competitive advantage with its portable stereo systems (this first-mover advantage was temporary) Microsoft had a competitive advantage with its unique Windows operating system Does Microsoft still has a competitive advantage with its Windows operating system? Perhaps – primarily due to its first-mover advantage since it is difficult to switch operating systems and users face interoperability if they are using different operating systems at the same organization. How many students in your class are currently using Windows? What are the competitors to Windows? Linux and Macintosh Why are there only three primary competitors in this large operating system market? What would happen if you had 50 different operating systems to choose from? Issues with interoperability How many different types of Microsoft Office would be required to support all 50 different operating systems? 50
Technology has the opportunity to play an important role in environmental scanning For example, Frito-Lay, a premier provider of snack foods such as Cracker Jacks and Cheetos, does not just send its representatives into grocery stores to stock shelves—they carry handheld computers and record the product offerings, inventory, and even product locations of competitors. Frito-Lay uses this information to gain business intelligence on everything from how well competing products are selling to the strategic placement of its own products.
Buyer power – high when buyers have many choices of whom to buy from and low when their choices are few Supplier power – high when buyers have few choices of whom to buy from and low when their choices are many Threat of substitute products or services – high when there are many alternatives to a product or service and low when there are few alternatives from which to choose Threat of new entrants – high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market Rivalry among existing competitors – high when competition is fierce in a market and low when competition is more complacent
Buyer power can also be called customer power Calling buyer power customer power sometimes helps students understand the difference between buyer power and supplier power To reduce buyer power (and create a competitive advantage), an organization must make it more attractive for customers to buy from them than from their competition One of the best IT-based examples is the loyalty programs that many organizations offer Which kinds of loyalty programs are you currently using? Frequent-flyer miles Grocery store discounts – “Safeway Card” Restaurant discounts such as Subway’s get your 12 th sandwich free Coffee clubs where you get your 10 th cup of coffee free
Supplier power is the converse of buyer (customer) power A supplier organization in a market will want buyer (customer) power to be low The supplier wants to be able to set any price it wants for its goods, and if buyers (customers) have low power, then they do not have any choice but to pay the high price since there are only one or two suppliers What is an example of an organization with “high” supplier power? Microsoft, Government regulated products such as energy markets and telecommunication markets in some countries How an organization can be both a supplier and a buyer in a supply chain? Discuss how Dell computers is both a buyer and supplier in the supply chain Dell is a buyer (customer) of parts, and a supplier to its customers who buy computers
Do you consider eBay to be a B2B marketplace? If the auction is between two businesses then yes If the auction is between a customer and a business, or two customers, then no
As the bids in a reverse auction become lower and lower, more and more suppliers drop out of the auction What effect does this have on supplier power? It reduces supplier power and creates a competitive advantage for the buyer organization since it is paying the lowest possible price for its goods and services
Ideally, an organization wants to be in a market in which there are few substitutes for its products or services This is difficult to achieve, and most organizations create a competitive advantage through switching costs - the more painful it is for a customer to switch suppliers, the less likely they are to switch If a customer has to experience pain when switching to a different service provider, then they are unlikely to switch For example, switching doctors usually involves sending all medical records and explaining all past medical history to the new doctor. Insurance also has to be transferred, along with detailed forms that the customer will be required to complete (such as family history, personal history, HIPAA, etc.) For these reasons customers have to be extremely dissatisfied with a doctor before they will endure the pain of finding or switching to a new doctor
What is an industry that has a high entry barrier? Energy – the organization has to have the infrastructure to support energy Telecommunications – the organization has to invest in a telecommunications infrastructure prior to offering services Banking – the bank must offer its customers an array of IT-enabled services including ATMs and online account services What is an industry that has a low entry barrier? Restaurants – simply lease a space, obtain a license, and you can sell food Catering – simply offer food and deliver Movie rental – simply buy the movies, pay the licensing fee, and offer the movies for rental (although if you want to be a Netflix the entry barrier is high because you have to have the facilities and systems to mimic their movie supply chain)
What are a few industries where competition is high? Restaurants, products, telecommunications, banking What are a few industries where competition is low? This is typically highly regulated industries such as energy markets and stock exchanges CLASSROOM EXERCISE Porter’s Five Forces Porter’s Five Forces is an easy framework to understand and offers students a quick way to analyze a business. Porter’s Five Forces is also reinforced throughout the text and it is important that your students have a solid understanding of each force. For this exercise, break your students into groups and ask them to choose two products to perform a Porter’s Five Forces analysis. The two products must compete in the same market. Potential Products Laptop Computer and Desktop Computer PDA and Laptop Computer iPod and Walkman DVD Player and VCR Player Digital camera and Polaroid Camera Cell Phone and Blackberry PDA Coca-Cola Plastic Bottle and Coca-Cola Glass Bottle GPS Device and a Road Atlas Roller skates and Rollerblades Digital Books to Printed Books Digital Paper to Paper
Broad cost leadership: Broad strategies reach a large market segment Broad differentiation: Focused strategies target a niche market Focused strategy: Focused strategies concentrate on either cost leadership or differentiation
Three generic strategies in the auto industry It is important to explain to your students that organizations are encouraged to follow only one of the three strategies What would happen to Hummer if it wanted to follow a broad cost leadership and a focused strategy? Hummer would find itself facing the dilemma of attempting to market and sell a highly specialized and expensive product at a discounted price. It simply wouldn’t work!
To create a competitive advantage, the value chain must enable the organization to provide unique value to its customers Examining the organization as a value chain determines which activities add value for customers The organization can then focus specifically on those activities
Review figure Generic Strategies and Industry Forces for an overview of the combination of Porter’s Five Forces and three generic strategies for each segment This figure is probably too much for a slide, please feel free to delete and have your students review the figure in the text or expand the figure to the full size of the slide
Primary value activities acquire raw materials and manufacture, deliver, market, sell, and provide after-sales services Support value activities support the primary value activities Customers determine the extent to which each activity adds value to the product or service The competitive advantage is to: Target high value-adding activities to further enhance their value Target low value-adding activities to increase their value Perform some combination of the two
If an organization wants to decrease its buyer’s or customer’s power, it can construct its value chain activity of “service after the sale” by offering high levels of quality customer service This will increase the switching costs for its customers, thereby decreasing their power (buyer power)
1. How can Apple use environmental scanning to gain business intelligence? Environmental scanning is the acquisition and analysis of events and trends in the environment external to an organization. Apple can use environmental scanning to analyze everything from competitor strategies to understanding new and shifting market trends to determining the strategic placement of Apple stores. Without watching its environment and understanding what its competitors are doing and where the market is headed, Apple will have a difficult time setting its strategic direction, as Steve Jobs determined when he thought he had missed the MP3 bandwagon. 2. Using Porter’s Five Force Model analyze Apple’s buyer power and supplier power. Apple’s buyer power was low when it first introduced the iPod since it was first to market with the product. Now, there are many competitors to Apple’s iPod and its buyer power is increasing since customers can choose from many different manufacturers of MP3 players. Apple’s supplier power was high and now it is decreasing since buyers have many choices of whom to buy from.
Which of the three generic strategies is Apple following? Apple follows a focused strategy 4. Which of Porter’s Five Forces did Apple address through the introduction of the iPhone? Apple addressed decreasing buyer power and increasing supplier power. The iPhone is revolutionary and first to market, which always increases supplier power. Of course, as new products enter the market with fast followers Apple will lose this competitive advantage and buyer power will increase. It also influenced the threat of substitute products for many other cell phone providers such as Sprint and Verizon.
Additional Case Material The race to build this technology is still going strong. Nokia is putting new technologies over cell phone covers, which can transmit data to any MasterCard-supporting device. Cell phone covers no longer serve as just mere removable facades or add-ons to personalize your phones, now they are your very own digital paying devices. Nokia is currently testing specially made cell phones in retail stores, restaurants, and other sales establishments in several U. S. cities. Soon we are going to see people waving their cell phones, not just to get somebody's attention, but also to pay up and shop as well. MasterCard, which has developed the technology that allows devices to communicate merely by tapping one device with the other, is taking the next step towards making cell phone covers and credit card readers communicate over the air. MasterCard is also developing new credit card technology that allows the credit card to be read without being swiped on a reading machine.
1. Do you view this technology as a potential threat to traditional telephone companies? If so, what counterstrategies could traditional telephone companies adopt to prepare for this technology? Traditional telephone companies have lost a large part of their market share, and the associated revenues, to cell phone companies. If this new technology attracts even more customers to the cell phone market, the traditional telephone companies stand to lose additional market share and revenues. For this reason, this type of technology is a definite threat to the traditional telephone companies. The traditional telephone companies will have to find new ways to entice customers. One possibility would be to implement the ability for the home phone owner, who is also an ISP customer, to purchase online retail goods and have the charge applied to their home telephone bills. Here is a link to a company that allows customers to charge fitness training to their cell phone or landline “traditional telephone company” bills. http://www.nestacertified.com/cellcharge.html 2. Using Porter’s Five Forces describe the barriers to entry for this new technology. The barriers to entry include the new technology (special chip for the phone) required to support associating a cell phone with a credit card, partnership between the credit card company and the cell phone company, minimizing security issues associated with the technology, and gaining consumer trust. One of the biggest barriers to entry will be convincing cell phone users that the technology is secure. How will lost and stolen cell phone and credit card bills be handled? A person with a stolen cell phone could now purchase all kinds of goods on the credit card. Will this be the consumer’s responsibility? Would you be willing to associate your credit card with your cell phone?
3. Which of Porter’s three generic strategies is this new technology following? This technology is following a differentiation strategy for a broad market 4. Describe the value chain of the business of using cell phones as a payment method. The value chain approach views an organization as a series of processes, each of which adds value to the product or service for each customer. Using a cell phone as a payment method would add value to the primary value activities because it would become easier for customers to purchase products. When a customer simply has to swipe their phone to pay for a product they are receiving a value-added benefit from this technology. 5. What types of regulatory issues might occur due to this type of technology? Typical credit card regulatory issues would most likely be enforced to cell phone spending such as not being allowed to purchase illegal goods such as gambling (lottery tickets) on credit, cigarettes under the age of 18, or alcohol under the age of 21. Punishment for using a stolen cell phone to purchase goods would be enforced by law. There might even be spending limits on cell phone purchases similar to the limit on ATM cards to only $400 a day withdrawals. 6. How could Apple’s iPhone use this technology to gain a competitive advantage? By offering customers the ability to purchase products from the iPhone it would be once again first to market with new technology. People would be excited not to have to carry a purse or wallet with credit cards – as long as they have their phone they could purchase items. Of course security and ethics play a big role in this technology and would be hard for many customers to feel comfortable associating a credit card with their cell phone.
Learning Outcomes2.1 Explain why competitive advantages are typically temporary2.2 List and describe each of the five forces in Porter’s Five Forces Model2.3 Compare Porter’s three generic strategies2.4 Describe the relationship between business processes and value chains 2-2
Identifying Competitive Advantages• To survive and thrive an organization must create a competitive advantage – Competitive advantage – a product or service that an organization’s customers place a greater value on than similar offerings from a competitor – First-mover advantage – occurs when an organization can significantly impact its market share by being first to market with a competitive advantage 2-3
Identifying Competitive Advantages• Organizations watch their competition through environmental scanning – Environmental scanning – the acquisition and analysis of events and trends in the environment external to an organization• Three common tools used in industry to analyze and develop competitive advantages include: – Porter’s Five Forces Model – Porter’s three generic strategies – Value chains 2-4
The Five Forces Model –Evaluating Business Segments• Porter’s Five Forces Model determines the relative attractiveness of an industry 2-5
Buyer Power• Buyer power – high when buyers have many choices of whom to buy from and low when their choices are few• One way to reduce buyer power is through loyalty programs – Loyalty program – rewards customers based on the amount of business they do with a particular organization 2-6
Supplier Power• Supplier power – high when buyers have few choices of whom to buy from and low when their choices are many – Supply chain – consists of all parties involved in the procurement of a product or raw material 2-7
Supplier Power• Organizations that are buying goods and services in the supply chain can create a competitive advantage by locating alternative supply sources (decreasing supplier power) through B2B marketplaces – Business-to-Business (B2B) marketplace – an Internet-based service that brings together many buyers and sellers 2-8
Supplier Power• Two types of business-to-business (B2B) marketplaces – Private exchange – a single buyer posts its needs and then opens the bidding to any supplier who would care to bid – Reverse auction – an auction format in which increasingly lower bids are solicited from organizations willing to supply the desired product or service at an increasingly lower price 2-9
Threat of Substitute Products or Services• Threat of substitute products or services – high when there are many alternatives to a product or service and low when there are few alternatives from which to choose – Switching cost – costs that can make customers reluctant to switch to another product or service 2-10
Threat of New Entrants• Threat of new entrants – high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market – Entry barrier – a product or service feature that customers have come to expect from organizations in a particular industry and must be offered by an entering organization to compete and survive 2-11
Rivalry Among Existing Competitors • Rivalry among existing competitors – high when competition is fierce in a market and low when competition is more complacent • Although competition is always more intense in some industries than in others, the overall trend is toward increased competition in just about every industry 2-12
The Three Generic Strategies – Creating a Business Focus • Organizations typically follow one of Porter’s three generic strategies when entering a new market 2-13
The Three Generic Strategies – Creating a Business Focus 2-14
Value Creation• Once an organization chooses its strategy, it can use tools such as the value chain to determine the success or failure of its chosen strategy – Business process – a standardized set of activities that accomplish a specific task, such as processing a customer’s order – Value chain – views an organization as a series of processes, each of which adds value to the product or service for each customer 2-15
Value Creation• Combining Porter’s Five Forces and three generic strategies create business strategies for each segment 2-16
Value Creation• Value chains with Porter’s Five Forces 2-18
OPENING CASE STUDY QUESTIONSApple – Merging Technology, Business, and Entertainment 1. How can Apple use environmental scanning to gain business intelligence? 2. Using Porter’s Five Forces Model, analyze Apple’s buyer power and supplier power 2-19
OPENING CASE STUDY QUESTIONSApple – Merging Technology, Business, and Entertainment 3. Which of the three generic strategies is Apple following? 4. Which of Porter’s Five Forces did Apple address through the introduction of the iPhone? 2-20
CHAPTER TWO CASESay “Charge It” with Your Cell Phone • By associating a credit card with a cell phone, banks and credit card companies hope to convince consumers to buy products, such as soda, with their cell phones instead of pocket change • A transaction fee will be charged for each transaction • The ability to charge items to a cell phone has significant business potential 2-21
Chapter Two Case Questions1. Do you view this technology as a potential threat to traditional telephone companies? If so, what counterstrategies could traditional telephone companies adopt to prepare for this technology?2. Using Porter’s Five Forces describe the barriers to entry for this new technology 2-22
Chapter Two Case Questions3. Which of Porter’s three generic strategies is this new technology following?4. Describe the value chain of the business of using cell phones as a payment method5. What types of regulatory issues might occur due to this type of technology?6. How could Apple’s iPhone use this technology to gain a competitive advantage? 2-23